by Ron Suskind
Inside the large conference room at the New York Fed, the heads of the major banks looked up and down the table. CNBC was now openly speculating about Lehman’s impending bankruptcy, as the CEOs were forced to do with Lehman’s books what many had avoided doing at their own firms: look hard at dizzyingly complex asset-backed securities that a thirty-year debt fixation had bred and try to fix a value on credit default swap contracts linking all the banks in a daisy chain of disaster. Each of them was committed to kicking money into the Lehman hole, filling it, in essence, so Barclays would buy everything else. But had they really assessed all of Lehman’s obligations? Everyone knew they hadn’t. Who knew how many CDOs and CDSs Lehman had off its balance sheet, funded by overnight repos? Anybody’s guess.
By the late morning on Sunday, after a sleepless night, Greg Fleming and Greg Curl were closing in on a final deal. Lewis had been peripherally involved. Thain, not at all. And that was the key. “This is it,” Curl said. “It’s $29 a share, a $50 billion acquisition. There is not a nickel more that we are willing to pay.” It had been a night of insane brinksmanship inside Merrill, with factions forming and breaking up, price-per-share numbers flung in every direction—all the way down to $2 a share by some fearful Merrill advisers. Fleming immediately told Curl that $29 a share—a 70 percent premium to where the stock closed on Friday—would work. He now just had one call to make.
“John, it’s done. We got them at $29!”
There was an unexpected silence on the other end.
“That’s great,” Thain said, “but I think we can get $30.”
Fleming paused. A joke? “Come again?”
“I said we should go for $30. Call them back and get $30!”
Fleming felt the thread of sanity, the one that had helped him keep his cool over the most chaotic weekend of his life, tremble and break.
“You can call them back. Twenty-nine is it. I refuse to call them back.”
How had a call that was supposed to be triumphant—euphoric, even—turned so acrimonious?
“You know what, Greg?” Thain shouted. “You are starting to piss me off!”
The line went dead.
It took a minute for Fleming to see it. It was just human nature. Thain had been notably absent from the biggest deal in his company’s history. In fact, he had been the biggest obstacle to getting it done. Now he wanted to put his thumbprint on the final document so he could go on to say, “I made this happen.”
A half hour later, Thain called back. “Yes, it’s time to move,” he said quietly, as though breaking out of a trance. He threw in some caveats to create the illusion of having been involved in the historic deal, and in the loss of his prized seat at the CEO table.
Fleming said, sure, those were easy additions. And thanked his dazed CEO. Fleming had survived in his career by sticking with businesses handling money and risk that had been around, in various forms, for a century. And this core of Merrill, soon to be part of Bank of America, would survive with him—a twenty-fifth-hour maneuver that averted probable catastrophe.
A few hours later, as news of the Merrill deal spread through Wall Street’s back channels, Paulson and Geithner assembled the CEOs in the conference room. They’d just finished a round of midmorning conference calls with Darling and the British regulators.
They wouldn’t approve the deal. Barclays was out. Paulson was incredulous. Darling told Paulson he didn’t want to take on “the cancer” of a flailing Wall Street giant. Paulson, while frustrated, knew that for Lehman Brothers, the prestigious investment bank, liquidation had become inevitable. Now all Paulson, Bernanke, and the country could do was brace for impact.
The CEOs were quiet; Paulson and Geithner, grim. They hadn’t listened carefully to what the British were saying when they’d all talked on Thursday. They’d slammed into a brick wall of “no.”
In some ways, this officially ended a year of colossal failure for Paulson, Geithner, and Bernanke. There was very little new information about the nature of the financial crisis that had emerged since the fall of 2007. All of what was knowable then was knowable now, and certainly discoverable with a round of modest, government-sponsored inquiry: the U.S. financial system was on the verge of collapse, ready to blow. What had been done in that year was emblematic of the modern dilemmas of projecting confidence, whether or not it is justified. Bernanke set up a “liquidity facility” in the fall of 2007. It had lent hundreds of billions in what was all but free money to banks, shadow banks, investment houses, and other companies to prop them up while the market could somehow correct itself. Insofar as the program was successful, as a stopgap, it was because it was secret—a fundamental violation of long-standing principles of corporate accounting, where the source of each dollar is supposed to be clear. As to any structural solutions, both the Fed and the Treasury ducked, as did the Bush administration, because acknowledging the need for dramatic action and then forcing architectural changes in the system would have undermined “confidence in the markets.” The Treasury’s main contribution was a grant of $30 billion to Dimon to take over Bear Stearns, and little else.
In the panicked weeks of September, the only job of noteworthy public officials was to provide a buyer with the capacity to purchase Lehman Brothers. They mistakenly thought Barclays was such a buyer, even when their fellow regulators in the United Kingdom strongly suggested otherwise.
The entire “Lehman weekend” had been a waste of time.
The only bright spot was that it had kept John Thain occupied so Greg Fleming could sell the giant investment house out from under him, and avoid having Merrill collapse on top of Lehman.
After Paulson’s mea culpa, all the CEOs slipped out to call their trading desks. Unwind Lehman trades as quickly as possible. That afternoon they’d all huddle to try to figure out how to control the damage to each of their firms.
Wolf slipped out and dialed Obama. “It’s over, Barack. Lehman’s dead. But this is probably just the start. AIG—they’re bigger, more interconnected, and there’s no way they’ll survive.”
“As bad as we thought it could be?” Obama said.
“Worse,” said Wolf. “Much worse.”
Dick Fuld of Lehman Brothers assembled his senior managers on Sunday afternoon and told them what they already suspected: the 158-year-old investment bank would have to file for bankruptcy the next day. Fuld was depressed and angry, but even more than that, as a Wall Street sovereign used to seeing reality bend to his will, he was in a state of shock. Speechless employees crowded his office on the thirty-first floor of Lehman’s Seventh Avenue headquarters. As dusk settled, he tried to call Geithner at the Fed. They would never let Lehman fail. He was told Geithner was nowhere to be found.
At 1:45 a.m., a few hours into Monday, September 15, Lehman Brothers filed.
The prebankruptcy valuation of Lehman’s assets was $639 billion, making it the largest bankruptcy in U.S. history—by a factor of six. (WorldCom came in next, at a mere $104 billion.) The numbers were off the charts: $40 billion in commercial real estate, $65 billion in residential real estate, another $100 billion tied up in CDOs, CDSs, and other exotic asset-backed securities and derivatives. And yet for all the attention paid to mortgage securities and their derivatives, the most shocking number of all was that Lehman carried $300 billion in repos and their equivalent—nearly 50 percent of its total holdings.
Carmine Visone went to work on Monday morning as he had every Monday morning for thirty-seven years. He had kept tabs on what was happening. It wasn’t hard. Just turn on the television. Everyone sat in front of screens the previous week: the computer screens at their desks; the flat screens on the walls.
He and other senior managers were on the phone, cursing and scheming all weekend. Now he went to the office in a daze.
What is it like to stand inside a collapsing world? Things that seem so solid—solid like the earth, as regular as a sunrise—and then nothing?
Fleming had scored the one suitor. He went home on Sun
day night, hugged his wife, and wept.
Carmine, in this game of acey-deucey, was left looking out his twelfth-story window. The crowds still flowed up and down Fifty-fourth Street. Most of the people and cameras were gathered at the larger Lehman Building, the headquarters—five wide blocks across town, and down nine, on Forty-fifth and Sixth.
The lunch crowd was gathered at Bice, someone sitting at Carmine’s table. How many lunches, over how many years? He was a throwback all right: he’d given his whole life to this company. Thirty-seven years. He walked in at twenty-one, worked in bookkeeping. Now, in a flash, he was a sixty-year-old man facing however many years he had left as the butt of jokes, or worse. There’d be lawsuits—God, did he hate those fuckin’ lawyers—and, worse, there’d be shame. Managing partner; real estate; Lehman Brothers. You’ve got to be kidding me. It’s like a punch line.
How could he face the world—that world? So Carmine Visone started to work out the logistics. How to get the window open wide enough. That wouldn’t be hard. He was as strong as three men; he could break it with his fist. He’d wait for an opening, to make sure he didn’t hit anyone on the sidewalk. It was the honorable thing to do.
After some time passed—he isn’t sure how long—he got up and looked out his door and into the wider office. A last look. The secretaries were crying, boxing up their stuff. He watched them. It was their home, too. And God knows, they had no cushion, most of them. He had a lot more than they did: money in the bank, plenty of it, and Kathleen, and the nice house in Jersey. And from there it wasn’t far, along the chain of references that make up a life, to see the U-Haul truck and all those poor bastards he’d handed food to over the years, and how they thanked him and said, “God bless you,” over and over, one cold night after the next. What would they all say if he jumped out a building as if he had nothing to live for?
And that’s how all those hungry people returned the favor. Carmine Visone decided not to jump. With tears running down his cheeks, he began to pack up his box. After a few minutes, all he had left was to decide if he’d leave his jacket on its hanger behind the door. It didn’t seem right to wear it out, like a guy in uniform with an appointment to keep.
He looked at the jacket for minute, maybe more. It had a nice stitch, was a good shade of gray for him, and well made. And he’d paid cash for it. Grabbing the jacket, feeling the soft fabric in his hand, he seemed to remember that this was a way to find worth in this world, usually in the things you could touch.
He threw the jacket into his box. He’d go out like he came in: in shirtsleeves.
6
The Rise
The week of September 15 was a whirlwind in America that spread across much of the globe—one of those rare moments when foundations are uprooted, shown to be insubstantial. Modern market economies, those steadily growing organisms that have generated stunning wealth over the past two centuries, showed their soft underbelly: trust. What is a dollar bill but a piece of paper that one trusts will be honored as legal tender? What is an investment bank but a legal entity that acts as a custodian and intermediary in the handling of money, or stands between parties in a trade? As buyers and sellers collide and couple in the vast global marketplace—with little to bind them beyond the self-interest of one party having money and the other needing it—the institution makes certain that everyone honors his obligations, or legal remedies are triggered. That’s their essential function. When the financial institution itself can’t honor its obligations, panic is uncorked. On Monday morning, clients of all kinds found that Lehman—or, more specifically, Lehman’s London office, where $5 billion was housed—couldn’t honor its obligations, not to everyone at once. Certainly anyone who has a passing knowledge of banking or finance, or who has seen It’s a Wonderful Life, knows that the obligations to everyone cannot be met all at once. All the money, either deposited or invested, isn’t sitting in a closet, neatly stacked. It’s out there working, invested in this or financing that—a plain, known fact that no one wants to hear at the moment their money is unattainable and trust vanishes.
When the institution is America’s fourth-largest investment bank, the fear, spreading like a contagion, is that other institutions anchoring the global financial system will not be able to honor their obligations. By midday, eastern standard time, other investment banks started to see clients pulling their money out, and worried that more would follow. On Tuesday, Moody’s and Standard & Poor’s downgraded ratings on AIG, the world’s largest insurer, which was the guarantor of eight million insurance policies with a face value of $1.7 trillion, and tens of trillions in swaps between financial institutions. That same day, the Reserve Primary Fund, the venerable money market fund largely responsible for inventing the very concept, lowered its share price below one dollar—normally the guaranteed “a dollar in means a dollar back” net asset value for money market funds—and halted redemptions. This so-called breaking the buck caused redemptions to be frozen at other money market funds, the safest, banklike investments that form the core of the commercial paper market, the short-term loans that companies have long used to fund expenses.
On Wednesday the Federal Reserve announced it was lending $85 billion to AIG, to prevent the insurer’s having to file for bankruptcy, and began its preparations, to be announced the next day, to guarantee all money market funds. Meanwhile, a fleet of banks had announced they were taking drastic measures. Washington Mutual put itself up for sale, Morgan Stanley and Goldman Sachs watched their usually rock-solid share price drop by double-digit percents, and Wachovia thought its prospects were bleak enough to enter merger talks with Morgan Stanley. In a seventy-two-hour span, the Dow plummeted an unprecedented 1,100 points.
Spreading from investment banking to insurance, money market funds, commercial paper, and then commercial banking, it was a run—no different from depositors converging on the doorsteps of banks in 1929—across the global financial system. In chaos lies opportunity, and in this case, the two candidates for president were afforded a rare chance to show the nature and posture and assuredness of leadership. It was here, in their responses to the crisis, that Obama and McCain would starkly diverge, in temperament and public approval alike. McCain started the week with the same line from a week before: “the fundamentals of the economy are strong.” Coming on the very day of Lehman’s collapse, this attempt at surety or consistency seemed redolent of Bush’s brittle brand of stay-the-course resolve in the face of any disaster. It was a sign of either stubbornness or ignorance, two qualities that made McCain look like a doddering old man.
Speaking in Elko, Nevada, on the seventeenth, Obama managed to frame the crisis within the context of his campaign, yet not reduce its startling scope. “What we’ve seen the last few days,” he asserted, “is nothing less than the final verdict on this philosophy, a philosophy that has completely failed. And I am running for president of the United States because the dreams of the American people must not be endangered anymore. It’s time to put an end to a broken system in Washington that is breaking the American economy. It’s time for change that makes a real difference in your lives.”
Paulson had spent the weekend of crisis operating out of the Waldorf-Astoria hotel. By Thursday, September 18, the venue had changed back to Washington. He needed to sell lawmakers on the fact that the systemic risks the economy faced were not only catastrophic but imminent. At 3:30 p.m. he went to the White House and told the president that he intended to ask Congress for a huge sum of money with which to purchase toxic assets from the banks. Bush trusted Paulson on financial matters and gave his blessing to what would turn into the Troubled Asset Relief Program. Now it was a matter of winning over the legislators.
That evening, as a group of key policy makers gathered in Speaker of the House Nancy Pelosi’s office, Paulson and Bernanke figured that their best shot at passing TARP was to terrify this group, to make them all feel what these two men had been feeling for a week. Not a man known for histrionics, Bernanke opened the meeting on
a dramatic note.
“I am a student of the Great Depression,” he began. “Let me state this clearly. If we do not act in the next few days, this will be worse than the Great Depression.” He let the statement sink in, just long enough for Senator Chris Dodd to gasp audibly, before he continued: “Investors have lost confidence in our capital markets. It is a matter of days before we will witness a series of catastrophic failures.”
It was Senate Majority Leader Harry Reid who finally broke the ice.
“The markets were up,” he remarked, demonstrating a thoroughgoing ignorance of the situation. Paulson’s blood, meanwhile, was boiling. The only reason the markets had rebounded at all was that Wall Street was anticipating a rescue plan at any minute! But Paulson knew he could not openly berate the lawmakers, even if they had no idea what they were talking about. He needed somehow to convince them that the issue’s urgency was apolitical.
“This is a one-hundred-year situation,” he explained. “We can’t deal with it around the edges. There are a series of tactical things that need to take place or else all hell will break loose.” He wasted no time on that minutia. “This needs to be done by next week. It will take a comprehensive approach to deal with illiquid assets on the balance sheets of these institutions. We are going to ask for the authority to purchase these toxic assets. This is neither a case of regulation or deregulation,” he said, trying to distance himself from the image of the free-market demagogue that he knew the Democrats had of him. “The Treasury needs broad authority to purchase illiquid assets from the balance sheets of financial institutions. It goes beyond Wall Street. At bottom these are mostly home loans. If we take care of these illiquid assets, I believe it will stabilize the system.”